Russia’s Capital Outflows: Not What They May Seem

When the Central Bank of Russia reported late Friday that net capital outflows last year dropped to $56.8 billion–from $80.5 billion the year before and below official forecasts of up to $65 billion–the data appeared to be a rare bit of good news for the Kremlin’s efforts to woo much-needed investment. But as economists have dug into the details, the situation has begun to look less upbeat.

Capital flight has been a hot topic in Russia, especially during the parliamentary elections in 2011 and presidential election last year, when Kremlin critics alleged that political uncertainty was prompting investors to park their money abroad.

From 2008 to 2011, the world’s largest oil producer saw nearly $305 billion leave, an exodus that was blamed mostly on a poor business climate and lack of investment opportunities in Russia.

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In 2012, the capital-outflow pattern didn’t change much as the share of net private outflow in the current-account surplus declined only to 80.5%, compared with 81.4% in 2011.

In the fine print of its statement last Friday, the central bank confirmed a change in the way it calculates the outflow.

“It was a technical issue. The revision really came from the arrangement of swaps, used by the private sector to increase liquidity, and it has counted as less capital outflow. I don’t think it’s a major structural change, it’s just a way you record those flows,” said Hans Timmer, director of the World Bank’s Development Prospects Group.

“In general, what the number said [is] that there is less capital outflow. It would be seen by many as a positive sign. But I would add that the focus shouldn’t be just on the size of the capital outflow. What is much more important is the nature of the outflow.”

Without that largely technical change the outflow would have been about $65.6 billion, close to the official forecast and, despite being an improvement from 2011, still a huge number.

The central bank said that in the second half of 2012, its amount of foreign-exchange swap deals with private banks had risen sharply as lenders were propping up tight ruble liquidity by exchanging dollars and euro flows.

With the change in its calculation, overnight currency swaps are included in Russia’s balance of payments as private-bank exposure to rubles, formally reducing the net capital outflow on the accounting day.

“These transactions [foreign-exchange swaps] had a substantial influence on the balance of banking-sector operations and changes in reserve assets, in particular, in the fourth quarter,” the central bank said.

“In this regard, in order to increase comparability [of the figures] with the previous periods, certain indicators of the balance of payments are presented without inclusion of ‘forex swap’ deals,” the central bank said, referring to the figure of $65.6 billion.

In late 2012, a state-run investment fund said the true flow of capital from Russia was less than half of the tens of billions of dollars annually reported by the central bank, calling for a new method for calculating an indicator that is frequently highlighted as a sign of Russia’s poor investment climate.

The same week, the central bank’s Chairman Sergei Ignatiev said the current mechanism for calculating outflow wasn’t ideal but the bank was “quite happy with it.”

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